What are the future prospects for China’s environmental protection industry?

Trend One Policy Adjustments Self-Correction and Prudent Momentum Over the past two years, the most frequently heard claim has been that the environmental protection industry is undergoing a major turning point. In fact, behind this industry-wide shift lies a corresponding shift—or rather, an adjustment—in policy. No industry’s policies can simply be implemented in a rush; the window for rapid growth typically lasts about five to ten years, roughly equivalent to one or two five-year planning cycles. Following this period, the industry enters a phase of adjustment, driven by the broader society—including all relevant stakeholders—engaging in self-correction and strategic bargaining. Each party has both the incentive and the need to reflect on past rapid growth and associated challenges, and to make necessary adjustments accordingly.

Trend One

Policy adjustments

Self-Correction and Prudent Action

Over the past two years, the most frequently heard claim has been that the environmental protection industry is undergoing a major transformation. In fact, behind this industry-wide shift lies a corresponding shift—or rather, an adjustment—in policy.

No industry policy can be implemented in a rush; the window for rapid development typically lasts about five to ten years—roughly one to two five-year planning cycles.

Subsequently, the industry will undergo a period of adjustment, driven by the broader society’s (including all stakeholders) process of self-correction and strategic bargaining. All parties have both the incentive and the imperative to reflect on and recalibrate in light of past rapid growth and the challenges that have emerged.

In 2013, the State Council issued the “Ten Measures for Air Pollution Prevention and Control”; two years later, in 2015, the “Ten Measures for Water Pollution Prevention and Control” were released; and a year after that, the “Ten Measures for Soil Pollution Prevention and Control” were promulgated.

A veteran in the environmental protection industry—who had already spent 20 years in the field by 2015—joked self-deprecatingly at a conference hosted by an environmentally focused listed company: “The release of these ‘Three Ten-Point Measures’ truly marks the dawn of a golden age for the environmental protection sector.”

After being jokingly dubbed a “sunrise industry” for two decades, it has now truly earned the title, finally seeing the long-awaited “opening of the floodgates” for three trillion-dollar markets.

“The bigger the water, the bigger the fish”—in this sweeping tide, some companies have set a revenue target of 100 billion for themselves.

Although it may seem like an ambitious target, setting a goal of hundreds of billions in a market worth trillions—or even tens of trillions—is by no means far-fetched. In fact, this is precisely the kind of aspiration that many companies and investors dream of achieving.

(Among the overarching trend of carbon neutrality, exporting China’s environmental protection expertise abroad represents a substantial business opportunity in the future. However, given our current industrial capabilities, there is still a long way to go before this can be realized.)

However, at the time, whether viewed from the perspective of policy, the market, or the overall industry sentiment, it could be said that the environmental protection sector was enjoying its golden moment.

Just as numerous companies had floored the accelerator, ready to rev up and race ahead, they suddenly found themselves facing a cliff—deleveraging. By the time they tried to rein in their momentum, it was already too late, and they were left with no choice but to plunge into the pit.

Many companies are still struggling in the mire.

However, even without the sudden and drastic deleveraging wave, any endeavor that runs counter to both sound business principles and technological logic is bound to end in utter chaos—like a game of musical chairs, with someone ultimately having to bear the consequences.

This is not hindsight; rather, it reflects the long-standing consensus among the industry’s top entrepreneurs and investors, who made such predictions even before the PPP debacle erupted. Their clear-eyed understanding of both business dynamics and policy trends enabled them to steer clear of a major fallout.

(But at the time, while everyone else was stepping on the gas, you were hitting the brakes—inevitably leading to misunderstandings among shareholders. This is precisely the moment that truly tests an entrepreneur’s mettle.)

Although the environmental protection industry has slowed following deleveraging, it continues to post robust growth. The size of China’s environmental protection market expanded from RMB 1.11512 trillion in 2016 to RMB 1.93004 trillion in 2020, representing a compound annual growth rate of 14.7%.

Since the start of the 14th Five-Year Plan, many have felt that the industry is eager to accelerate its pace but finds it difficult to do so ahead of schedule.

Behind this lies a shift in policy from an offensive stance to a defensive one.

Looking back at the past two to three decades of development in the environmental protection industry, we have at times lagged behind, gone off course, or even made fundamental missteps in our policies. Fortunately, however, we possess a strong capacity for error correction and self-reflection.

No one can execute perfectly on the first try; what matters is continuously solving problems as you move forward.

In the inaugural year of the 14th Five-Year Plan, many people have noticed that there are fewer “worth pursuing” projects than in the past. While macroeconomic factors certainly play a role, the more fundamental reason is that the industry itself has entered a period of adjustment.

From the perspective of policy in the environmental protection industry, the 12th Five-Year Plan period was one of policy formulation, the 13th Five-Year Plan period marked the full implementation of policies, and the 14th Five-Year Plan period has been one of policy adjustment.

Building on the stability of 2021, 2022 is likely to see a pronounced defensive stance, both in environmental inspections and in the rollout of policy measures.

Policy-making has shifted from broad, sweeping measures to a more precise and granular approach, with greater emphasis on in-depth, substantive, and meticulous implementation going forward.

Some friends may feel rather pessimistic about the current state of industry development, which is entirely understandable. In a situation where everyone is simultaneously preparing for contingencies and gearing up for competition, no one can easily emerge as the winner.

The era of rapid growth in the environmental protection industry has come to an end, but the era of its sustained, large-scale development is only just beginning.

Only environmental protection companies that have survived economic cycles and policy adjustments will have the opportunity to carve out their own niche in the era of large-scale environmental protection.

Trend Two

Technological upgrading

High Standards for Stock Upgrades and New Additions

Since the start of the 14th Five-Year Plan, both policy signals and actual market performance have made it clear to environmental protection professionals that growth in the traditional core segments—water, air, and solid waste—is slowing markedly, with some markets already peaking. In contrast, soil remediation, having started later than the other segments, remains in a phase of active market development.

Overall, the slowdown in the incremental market for the environmental protection industry is a major trend—more precisely, it represents a new normal. Even with this deceleration in growth, environmental protection remains a super-large market and the world’s largest single environmental protection market.

Over the past decade, our high-velocity, intensive development model has successfully met the challenges of critical battles, largely enabling China’s environmental protection sector to evolve from scratch.

However, to be frank, this stage of development is also characterized by one prominent feature: low quality.

Against this backdrop, from a grand-strategy perspective, companies must either enter new niche growth markets or upgrade and transform their existing market segments.

Our research conducted last year also clearly revealed that the industry’s leading players are vigorously pursuing market opportunities centered on quality improvement and efficiency enhancement.

A friend who heads the technology function at a leading company in the industry shared that they now review numerous new technologies every month; a rough tally for last year shows they examined around 60 to 70. Of course, truly innovative technologies with practical engineering application value are exceedingly rare.

However, driven by the pressure to improve quality and efficiency in operations, their need for new technologies is extremely urgent.

In theory, over the next decade all environmental protection facilities will undergo upgrades and renovations to varying degrees and scales.

However, the stock strategy is by no means an easy path; at its core, it requires forging a trail that few have ventured down—or even fewer can truly master. It demands not only passion but, more importantly, solid capabilities.

In addition to enhancing the quality and efficiency of the existing market, tapping into niche incremental markets has also become a strategic priority for environmental protection companies.

We have learned that, since last year, the growth in business volume for many leading companies in the industry has differed significantly from previous trends.

This incremental growth either involves identifying new niche application scenarios for our products or technologies, or deepening engagement with existing customers to help them address more environmental challenges.

Simply put, there are two main options when it comes to doing business:

First, the same or similar technology/product is extended to different customers;

Second, the same customer is adding different products/solutions.

However, in the incremental market, a notable shift has also emerged: projects are now being launched to high standards. Of course, some may argue that numerous irregularities still persist; nonetheless, overall, the standards for new projects are steadily rising, and the requirements for process technology are becoming increasingly stringent—this has become a major trend.

In this process, the old world and the new world will coexist, but the trend of one declining as the other rises has become irreversible.

Trend Three

Low Expectations for Capital

The Small Logic of Business and the Big Logic of Politics

The Small Logic of Business

During the 12th and 13th Five-Year Plans, substantial private capital poured into the environmental protection sector, driven by a straightforward rationale: stakeholders widely recognized both the sector’s promising prospects and its strong profit potential.

Even today, when the environmental protection industry is mentioned, many people’s first reaction is still that it holds promising prospects and lucrative opportunities.

Perhaps it is because the very nature of the environmental protection industry embodies humanity’s aspiration for a better life: investing in environmental protection is, in essence, investing in the future—and in that shared aspiration for a better life.

Alternatively, this industry may seem like the right path—one that can yield substantial profits—making it a viable option in China.

Based on these considerations, the logic is sound: environmental protection is undoubtedly a promising, future-oriented growth area.

The Grand Logic of Politics

However, after years of trial and error, capital realized that environmental protection is not a particularly lucrative business—and in many niche segments, there isn’t even a viable business model. Yet, driven by enthusiasm, companies plunged in anyway, only to see the entire enterprise ultimately collapse.

What is the underlying reason for this?

Overall, there is a misperception of the environmental protection sector.

To be more specific, an exclusive focus on the narrow logic of business has overlooked the broader logic of politics.

What is the overarching political logic?

First, regarding the nature of the industry: environmental protection is not a purely commercial sector; it has strong public-good characteristics.

Tracks with pronounced public characteristics are generally not permitted to generate excessive profits; this principle is even more pronounced under a socialist system.

Second, the profit-making logic: put simply, the era when private enterprises could just use money to make more money is over.

Let me draw an analogy to help everyone understand:

In the past, for every 2 yuan you had, you could borrow 8 yuan from a financial institution and use the total of 10 yuan to run a business.

Right now, for every 5 yuan you have, you can borrow another 5 yuan from a financial institution and use the total to run a 10-yuan business.

In the future, for every 8 yuan you have, you’ll be able to borrow 2 yuan from a financial institution and use that to run a 10-yuan business.

This is deleveraging.

It’s therefore easy to see why many companies have seen their revenues halved.

Because you’ve only ever had two yuan in your hands, the most you can do now is a four-yuan business—and in the future, it’ll be even less.

The logic behind this is easy to understand: if a company itself does not possess truly original, significantly advantageous technological capabilities, then simply handing over all the funds to you to run the business is hardly any different from pulling strings behind the scenes.

In the early stages of the great drive of reform and opening-up, such opportunities did exist; however, they are becoming increasingly rare today, and ultimately this door will close completely.

What is the country’s overarching strategy at present?

We encourage technological innovation and the pursuit of national development through real industry—meaning that only by solving problems others cannot solve and by creating value can one qualify for additional rewards.

This additional allocation is also a reward from society, which is entirely consistent with economic principles.

Over the past year, we’ve seen that whether in the digital realm or in the physical world, small-scale strategies must align with overarching, macro-level principles—only what conforms to these broader principles can endure in the long run.

Thus, we can also observe that capital’s attitude toward environmental protection is becoming increasingly calm and rational.

On the surface, this may give the impression that the environmental protection industry has suddenly cooled down; however, in the long run, it is actually a positive development for the industry.

The integration of capital and industry can only occur on the basis of mutual understanding between the two parties.

Now that capital has a clearer understanding of the environmental protection industry, investors are beginning to lower their expectations for returns, bringing them back into the range they should naturally occupy.

This indicates that the industry has entered a phase of rational development. While the environmental protection sector may no longer seem as glamorous as it once did, it is well-suited for steady, long-term growth—and many people are eager to get involved.

As we can see, over the past year the number of listed companies in the environmental protection sector has continued to rise, showing strong momentum to surpass previous years.

Therefore, there is no need to worry about capital abandoning you. As long as you align with the overarching national strategy, adhere to quality-driven development and common prosperity, possess core technologies of your own, and deliver products and solutions that create value for society, society will reward you more generously—and it will wholeheartedly incentivize talented individuals like you to make even greater contributions.

In the environmental protection industry, the dream of getting rich quick has faded, but the path to wealth remains.

Trend Four

Convergence of Competition

Internal Competition and External Marriage Proposal

The environmental protection industry is notoriously highly competitive.

Turning the bidding site into a competition arena, the client’s office into a competition arena, and the project site into a competition arena—these are all things we’ve done.

However, as the logic of development shifts and property owners’ awareness evolves, opportunities for internal competition among industry players are becoming increasingly rare—though localized conflicts still inevitably arise from time to time.

However, overall, following the large-scale competition, the industry has entered a new phase, with stakeholders beginning to think more creatively—clearly, relying solely on competition is not the way forward.

In other words, in the past, everyone focused primarily on competing head-to-head with a few familiar rivals within their own vertical; today, the emphasis is more on forging broader connections across different industries and sectors.

A distinctive feature of the environmental protection industry is that strong business relationships often develop among peers, with many opportunities for collaboration and expansion of operations facilitated through referrals and introductions from industry contacts.

While your businesses may differ—ranging from water treatment and food-waste management to hazardous-waste handling, air-quality management, environmental testing and monitoring, and photovoltaics—you likely serve the same customer segments, or your respective capabilities can be leveraged in a synergistic, cross-functional manner. Moreover, the high-priority key personnel you need may even be based in the same department, creating ample opportunities for collaboration across these areas.

The ability to recruit partners from outside the organization—essentially, the capacity to build intricate vertical and horizontal networks—has become a key soft competency for many environmental protection firms. Cultivating this capability to tap into incremental opportunities is also a way to alleviate the pressures of intense internal competition.

Under this logic, where matchmaking prowess trumps martial prowess, we are witnessing collaboration among industry peers unlocking tremendous potential for business growth.